After one of the most anticipated initial public offerings
in history, Facebook’s 19 percent drop this week prompted
investors to fault everything from Morgan Stanley’s role as lead
underwriter, to the company’s greed and the Nasdaq Stock Market.

“It was like the gang that couldn’t shoot straight,” said
Michael Mullaney, who helps manage $9.5 billion as chief
investment officer at Fiduciary Trust in Boston. He said he
placed Facebook orders for clients. “The underwriters mis-estimated what actual demand was, and there was pure execution
failure coming out of the Nasdaq.”

Taking the most heat is Morgan Stanley, said Mullaney. The
bank was lead underwriter among the 33 firms Facebook hired to
manage the $16 billion sale of stock. The bank decided with
Facebook executives to boost the size and price days before the
May 17 IPO, ignoring advice from some co-managers, said people
with knowledge of the matter, who declined to be identified
because the process was private. Morgan Stanley talked with few
of its fellow underwriters aside from JPMorgan Chase & Co. and
Goldman Sachs Group Inc. throughout the IPO, one person said.

“They overplayed the enthusiasm and probably just misread
the atmosphere of the marketplace,” said Keith Wirtz, who
oversees $15 billion as chief investment officer at Fifth Third
Asset Management in Cincinnati and bought some stock in the IPO.

Blame Game

Facebook increased the number of shares being sold in the
IPO by 25 percent last week to 421.2 million and raised its
asking price to a range of $34 to $38 from $28 to $35. Had
Facebook kept the original terms, investors may have had a
better shot at a first-day pop. Instead, the stock was little
changed in its debut because Morgan Stanley intervened to
prevent it from falling below the IPO price.

The shares fell 8.9 percent to $31 at the close today,
after an 11 percent drop yesterday.

Just days before Facebook raised the size and price of its
IPO, the company began telling analysts to lower their sales
forecasts, people familiar with the matter said. Morgan Stanley
analysts were among those who cut their projections during the
roadshow, said one person. The move also followed a May 9 filing
in which Facebook said advertising growth hasn’t kept pace with
the increase in users.

Investors Misled?

Some investors say they felt misled by the underwriters.
According to one London-based fund manager who asked not to be
named, bankers indicated demand was so strong that he placed a
bigger order than he thought he would get, leaving him with 40
percent more Facebook shares than anticipated. He sold most of
that stock on the first day of trading.

The decision to boost the price range reflected the demand
in the market, said a person involved in the process. Michael
DuVally, a spokesman for Goldman Sachs, and Pen Pendleton, a
spokesman for Morgan Stanley, declined to comment. Jennifer
Zuccarelli, a spokeswoman for JPMorgan, declined to comment.
Underwriters didn’t say how great demand was.

Morgan Stanley and Facebook consider problems with Nasdaq
OMX Group Inc.’s computer systems among the reasons for the
IPO’s performance so far, according to people familiar with the
matter. Nasdaq’s trading platform was overwhelmed by order
cancellations and updates that made the stock-market operator
unable to finish the auction required to open trading. The U.S.
Securities and Exchange Commission said it will review the
trading.

Nasdaq Software

Nasdaq Chief Executive Officer Robert Greifeld said on a
call with reporters on May 20 about the glitch that the opening
delay “had no apparent impact on the stock price,” noting the
share decline began after all brokers had received confirmation
about their trades in the opening auction. Robert Madden, a
spokesman for Nasdaq OMX, declined to comment beyond Greifeld’s
statement.

Nasdaq said in a notice yesterday it delivered all
outstanding execution and cancellation messages to brokers for
their IPO cross orders at 1:50 p.m. Facebook declined 5.9
percent after 1:50 p.m.

Facebook CEO Mark Zuckerberg and the early backers should
be held accountable for the stock drop, said Francis Gaskins,
president of researcher IPOdesktop.com in Marina Del Rey,
California. Goldman Sachs, Accel Partners, Digital Sky
Technologies and other existing holders boosted the number of
IPO shares they offered in Facebook on May 16, a day after the
company increased its price range.

‘Mispriced’ Market Value

“It’s a combination of Zuckerberg’s ego for that $100
billion market cap, and the shareholders selling who wanted an
exit,” said Gaskins. “Somehow it just missed them that this
was mispriced.”

Facebook Chief Financial Officer David Ebersman was the
point person on the deal, while Zuckerberg and Chief Operating
Officer Sheryl Sandberg weighed in on major decisions throughout
the process, people said. At Morgan Stanley, Dan Simkowitz,
chairman of global capital markets, was one of the main bankers
on the offering. Michael Grimes, global co-head of technology
investment banking at Morgan Stanley, also played a key role.

Underwriters did accomplish part of what they set out to
do: turn paper into cash for pre-IPO holders.

“It was successful for the liquidating owners, absolutely,
because they got all that and then some,” said Peter
Sorrentino, a fund manager who helps oversee $14.7 billion at
Huntington Asset Advisors in Cincinnati.

For the investors it was a different story.

“I shame the people who were lining up to buy the thing,”
said Sorrentino, whose firm didn’t buy stock in the IPO and
tried to talk clients out of purchases. “The financials were
there, do the math. Everyone wanted to be caught up in the
glamour offering of the year. People just had stars in their
eyes.”